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eBay is to buy Paypal, for $1.5bn in stock.

That's sorted then, or it will be when the deal closes at the end of the year. PayPal conducted its IPO in February - four months ago. Surely the point of that exercise was not to sell up so soon? All that expense could have been avoided by going for the trade sale in the first place.

But the capital markets are dead, and PayPal needs eBay - It became the world's biggest web micropayments platform on the back of an exclusive deal with eBay. and 60 per cent of its turnover derives from this auction marketplace. This exclusivity ended earlier this year, and eBay hoovered up stock in Billpoint, a rival payments provider. eBay will now phase out Billpoint at some point.

eBay reckons it can save operational costs by combining the two companies - earnings will be immediately accretive on a pro-forma basis (i.e. with the merger costs stripped out). The company also becomes substantially bigger by gaining control of the online payment system.

PayPal's Q2 turnover is expected to come in at $53-$54m, while eBay's Q2 revenues, announced today, were $266m. GAAP net income was $54.3m on sales up 46 per cent on the same period last year. eBay attributes the growth to the accelerating pace of US transactions.

eBay points to the market opportunities presented by the rest of PayPal's business, but post-acquisition, PayPal's non-eBay turnover may well fall. Its new owner intends to phase out business with gambling sites - 'regulatory uncertainty' is the rationale.

PayPal is a tad controversial - it's got jaw-dropping Ts&Cs and it's not very friendly to people outside the US. Also, there are occasional foul-ups, and several states want much closer scrutiny - if PayPal looks like a bank and acts like a bank, then it should be regulated like a bank. ®

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